Borrowing less than 75% of a property’s value when buying a home or remortgaging will allow you to unlock lower interest rates. But borrowers are generally aged 36 or older before they have a large enough deposit (or enough equity) to achieve this, according to Royal London analysis of FCA data.
When buying a home, your interest rate could depend on how much you’re borrowing as a percentage of the property value. And the same is true when remortgaging, when the lender will consider how much equity you hold. This is known as your mortgage’s loan-to-value ratio, or ‘LTV’.
But when it comes to deposits and equity, is bigger always better?
Read on to find out how much people of your age typically put down, and whether holding greater equity in a property automatically means better mortgage deals.
How does age affect mortgage LTV?
Perhaps unsurprisingly, Royal London’s analysis has revealed a correlation between a homeowner’s age and the proportion of the property they own.
Indeed, while borrowers are generally 36 years old by the time they hit the 25% ‘tipping point’ for cheaper rates, older borrowers may be even better off. The research found that those aged over 51 usually put down a deposit (or remortgage with equity) of more than 50%.
This may be unsurprising, given older homeowners have had longer to build up equity or save up cash.
If you buy a house with a deposit of 25% of the property price, for example, you’ll need a 75% LTV mortgage to cover the rest. But if you’ve built up equity of 40%, and want to remortgage, you’ll only need a 60% LTV loan.
First-time buyers tend to take out mortgages with higher LTVs as they’ve had less time to save up a deposit and haven’t owned property before. Homeowners who have already built up equity can use that value to borrow at a lower LTV.
The table below shows how LTVs shrink as borrowers grow older, based on mortgage data from 2018. Use it to see how much people in your age range usually pay.
- Use our LTV calculator to find out the ratio you’ll need based on the size of your deposit and the property’s price.
LTVs over time
Back in 2007, before the financial crisis, these figures were slightly different. While older borrowers still borrowed at lower LTVs, typical 18 to 25-year-olds took out 90-95% mortgages, rather than 85-90% they do now.
Borrowers also crossed over the 25% deposit ‘tipping point’ earlier, with 26 to 30-year-olds typically being able to borrow at this level. This reflects the increasing average age of first-time buyers, from 28 in 2007 to 34 now.
- Find out more: mortgage deposit calculator – when will you be able to buy?
Do lower LTVs always mean better rates?
Royal London says that people borrowing at 75% LTV or lower can access better deals than those with smaller deposits.
However, Which? analysis of Moneyfacts data found that this wasn’t always the case.
Looking at two-year fixed-rate deals across the board, we found that the best products with a 75% maximum LTV generally do have better rates than the best products at higher LTVs.
But mortgages with maximum LTVs of less than 75% rarely had better rates. In fact, the top-rate mortgages at 65% and 50% were often worse than their 75% counterparts.
The chart below shows how mortgage rates differ for different groups of borrowers at different LTVs, by taking an average of the top five best-rate deals in each band.
It’s important to note that even if you might be charged a higher interest rate at a lower LTV, you may be better off by borrowing less money. It’s also worth noting that we’re looking at the maximum LTV of these deals. You may still be able to borrow at 50% LTV with a product allows a 75% maximum.
If you’re planning to build up more equity or save a bigger deposit to secure lower rates, keep in mind that rates generally change in LTV increments of 5%. For example, a 17% deposit won’t get you a better deal than a 15% deposit – you’ll only qualify for the next ‘rung’ of deals once you hit 20%.
- Find out more: how much deposit do you need for a mortgage?
Building up your equity to remortgage
If you’ve been paying off your mortgage for a few years, you’ll usually have built up a bigger stake in your home than when you first bought it.
If you bought at 95% LTV, for example, after several years you may have paid off enough of your loan balance to remortgage at 90% and get a better rate.
This isn’t always the case, however. If the value of your property has decreased, there’s a danger you could be in negative equity – when your home is worth less than your outstanding mortgage.
To reduce the chances of this happening, consider buying in an area where property prices are likely to increase. Watch the video below, and read our tips on finding property hotspots for more.
Overpaying your mortgage
You can also build your equity faster by making mortgage overpayments. These are exactly what they sound like: paying more than you are required to.
You can either do this every month or as a more sporadic lump-sum payment. Every penny that you overpay goes towards lowering your mortgage balance and gaining a bigger stake in your property.
Bear in mind that most mortgages limit the amount you can overpay by, often to 10% per year.
It’s important to only make overpayments when you can afford them. Building up equity can be advantageous, but it’s not worth getting into financial trouble for.
- See how much difference overpaying could make for you with our mortgage overpayment calculator.